EPR Properties (EPR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter 2008 Entertainment Properties Trust Conference Call. My name is Katie and I'll be your coordinator for today. At this time all participants will be in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions). I would like to now turn the call over to your host for today, Mr. David Brain, President and Chief Executive Officer. Sir, you may proceed.

Thank you, Katie. Good morning to all. Thank you for being with us this morning. This is David Brain. Let me start with our usual preface. As we begin this morning I need to inform you this conference call may include forward-looking statements. As defined by the Private Securities Litigation Reform Act of 1995 identified by such words as will be, intend, continue, belief, may, expect, hope, anticipate, or other comparable terms. Come these actual financial conditions results of operations may vary materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause actual results to differ materially from those forward-looking statements is contained in the company's SEC filings including company's reported Form 10-K for the year ending December 31, 2007.

All right. Let me say again thank you for joining us. We always appreciate your investment of time and interest probably particularly in this day of extraordinary events occurring each and every day. As we begin this morning, I move to paraphrase, with apologies, Charles Dickens because it really feels like a tale of two companies. It is the best of times in terms of company performance and fundamentals and it appears to be the worst of times in terms of company stock performance. To help me illustrate and illuminate my cryptic beginning here are Greg Silvers, our Chief Operating Officer.

Good morning.

And Mark Peterson, our Chief Financial Officer.

Good morning.

As we get fully underway this morning, I want to remind and direct you and all once again that there is a simultaneous webcast link available from our website at www.eprkc.com. If you can please go there now to catch the visual as well as the audio portion of the presentation.

In times such as these of extreme volatility and unexplainable market conditions, I believe it makes sense to divide things into camps of what we know and can affect and what we don't know and can't control. In the latter camp is our recent stock price. Honestly, all I have to tell you is I don't know what to expect. In the former camp is the litany of great results you saw in our earnings press release. We'll go to the first slide.

In the three and nine month periods just ended revenues are up over 20%, net income is up about 30%, FFO is up nearly 30%. And on a per share basis, if you look at the, if we go to the next slide, net income and FFO are again, and I stress the repetition of this because of our demonstrated track record of repeating such results, up again approximately 10%. Also our common dividend paid was up 10% over last year. I hope this sounds good to you. It is representative of what we plan for, strive for and have been delivering.

In the camp of what we know is that the stock market is ultra-focused on leverage and liquidity. Those are things we can affect and have been managing of late just as we always do. Mark will go through all the details of the recent period financials but for years as well as currently, EPR has kept leverage low and the vast majority of our debt fixed on a long-term basis consistent with the lives and terms of our investments.

Going to the next slide, EPR's overall leverage is and has been about 50% of our book assets. Our credit and coverage ratios are and have been for years what are generally considered to be investment grade levels with interest coverage of about three and a quarter times and fixed charge coverage of about two and a half times. No real change here yet the stock is off massively in the last 30 to 60 days. The connection seems to have been dropped. As I said, liquidity also falls into the camp of the explainable and more controllable and here again we have good and consistent news.

Going to the next slide, as has been our demonstrated method of operation, EPR has accessed the capital markets in the third quarter consistent with our investment program and prudent balance sheet management. During the quarter we announced a new $225 million project funding commitment and also executed on capital formation of about $290 million, $113 million of equity and $177 million of debt. We have made it our policy and our practice to not let our commitments run ahead of our known capital capability.

One additional element of what we know although other than our original underwriting is not really much under our control is our tenant property level performance. I'd like to run through our key niche tenant industries with you. I believe you'll find this data very informative and comforting.

Our largest tenant industry focus, the first run exhibition industry, is demonstrating its often attributed recession-resistant nature. Box office revenues are up year-to-date about 1% over last year. Our ski property operator, Peak Resorts, has reported in October season pass sales are up over the prior year same time about 8%. Our charter public school operator, Imagine, has reported their so-called first hard enrollment counts. Taken in late September are up about, show enrollment up about 10% from a portfolio average of about mid-70s to mid-80s. Our winery operators, really don't have a reporting interval right now but I can tell you the 2008 harvest is roundly being considered called a success given that wine growing region has battled some tough frost this growing season and the anecdotal contact we have with them reflects healthy increase in sales. Overall the data is very positive, very encouraging, and quite a contrast to the recent decline in share price profile.

Before I leave our tenant industry news front, I want to touch on one other big news item in the quarter and this regarding exhibition. Just at the end of the third quarter it was announced that the negotiating consortium, DCIP, Digital Cinema Initiative Partners, formed by the three leading exhibition companies, AMC, Regal and Cinemark, have reached an agreement with the majority of Hollywood studios on a timetable and economics to support the transition of theatrical presentation from analog to digital including 3-D. This is huge. Progress that has been made up to now on this topic but with this large block of the industry reaching a global agreement, the progress will move from piecemeal to an accelerated pace.

This means good things for EPR. In terms of improvements at our property that we do not have to pay for and a more rapid advancement towards the alternative content and pricing power that we have discussed in our previous calls. We expect this not only to improve tenant profitability and thus stability, but also increase our profile of percentage rent collections in the future.

Now before I turn it over to Mark and Greg, I want to cover another very important point. In addition to our detailed quarterly review we also regularly discuss our outlook for the next calendar year in this, the third quarter call. This is a bit more difficult right now given the dislocation of the capital markets and the bad news is that the volatility is forcing us to consider 2009 as a year of very limited transaction volume.

The good news though is EPR in contrast to a lot of other Triple Net names is not wholly oriented on new acquisition accretion to grow shareholder value and returns. As we have stressed regularly in our calls and communication, EPR writes its leases and notes in those circumstances where we structure our investment as a loan with escalators and percentage and participating payments. These features along with the annualization of accretive transactions executed during the 2008 period are expected to yield a solid positive increase in 2009 per share results of up 2% to 4%.

We are at this time giving an official range of $4.65 to $4.95 of FFO per share for 2009. That is wider and asymmetrical, that is not centered around what I just said but that is a result of the extraordinary market conditions. It's hard to forecast much of anything today so we're attempting to be cautious and conservative. Our investment spending in 2009 is set at $125 million which is wholly composed of fundings for already announced portfolio projects. And importantly it's all capable of being funded with no new capital markets activity.

But hopefully as the world and the markets return to conditions of some greater level of stability, we do want investors to know that we have very positive elements in our portfolio and opportunity set to more aggressively advance shareholder performance metrics as conditions permit. Now I'll turn it over to Mark and then Greg for their comments and join you in a few minutes.

Thank you, David. I have a lot to cover today but let's begin with a review of the significant items from our recently completed third quarter. As you can see on the first slide our net income available to common shareholders increased 37% compared to last year from $20.7 million to $28.5 million. Our FFO increased 32% compared to last year from $29.6 million to $38.9 million. On a diluted per share basis FFO was $1.20 compared to $1.10 last year for an increase of 9%.

Turning to the next slide, for the nine months ended September 30, 2008, our net income available to common shareholders increased 24% compared to last year from $59.7 million to $73.9 million. Our FFO increased 26% compared to last year from $82.5 million to $104.2 million. On a diluted per share basis, FFO was $3.41 compared to $3.07 last year for an increase of 11%.

Looking at the details of our third quarter performance, our total revenue increased 22% compared to the prior year to $75 million. Within the revenue category, rental revenue increased 8% to $52.1 million, an increase of $4 million versus last year. Percentage rents included in rental revenue was approximately $600,000 for the quarter which was the same as last year. Tenant reimbursements increased 12% or $550,000. This increase is primarily due to expansion and leasing of the gross leasable area at our four Canadian entertainment retail centers. Mortgage and other financing income was $17.1 million for the quarter for an increase of $8.9 million versus last year. This increase is due to the higher outstanding balance of mortgage and notes and other notes receivable during the quarter compared to the prior year as well as financing income recognized related to our direct financing lease investment in Charter schools.

As noted in our press release in August we provided a two year secured first mortgage loan for a planned resort development in Sullivan County, New York. During the quarter we funded $132.5 million of $225 million total commitment. There will be more financial details on this investment in our 10-Q but the punch-line is that we are recording mortgage financing income with a yield of approximately 13.9% using the effective interest method. Greg will discuss this project in more detail in a few minutes.

On the expense side our property operating expense increased approximately $800,000 for the quarter. As with tenant reimbursements, this increase is primarily due to increases at our four Canadian entertainment retail centers as well as increases in our bad debt reserves. Other expense was approximately $430,000 compared to approximately $1 million last year. The decrease of $600,000 is due to $500,000 less in expense recognized upon settlement of foreign currency forward contracts and about $100,000 less in expenses related to our TRS operations at our family bowling center in Westminster, Colorado.

G&A expense increased $700,000 versus last year to approximately $3.7 million for the quarter. This increase is due primarily to increases in personnel related expense including share based compensation as well as increases in professional fees. Additionally, G&A expense for the third quarter of 2008 includes about $300,000 in costs associated with terminated transactions.

Interest expense increased one million or 6%. The increase in interest expense resulted from increases in debt associated with financing our additional real estate investments and notes receivable. Minority interest was $488,000 for the quarter and as in the prior year is due primarily to minority interest income related to our White Plains investment. As I have discussed previously, this accounting nuance related to White Plains does not impact our reported FFO. The minority interest income for the current quarter was partially offset by minority interest expense of $116,000 related to Global Wine Partners, our minority partner in VinREIT.

Looking at the ratios for year-to-date through September as David touched on, interest coverage was 3.3 times, fixed charge coverage was 2.4 times and debt service coverage was 2.5 times. As David mentioned these all remain very healthy and consistent with the past.

Now I'd like to discuss our recent capital markets activities. As has been our track record we have once again successfully accessed both the debt and equity capital markets at very attractive terms during the quarter. Turning to the next slide, during the quarter we raised approximately $113 million in equity. As we have previously announced at the end of June of this year, we began offering common shares under our revised dividend, reinvestment and direct share purchase plan. During July we issued 324,000 common shares at an average purchase price of $50.61 per share resulting in total net proceeds of approximately $16 million. Additionally in August we completed a registered public offering of $1.9 million common shares at a purchase price of $50.96 per share resulting in total net proceeds of approximately $97 million. Year-to-date we have raised over $300 million in equity at attractive pricing.

Now moving to debt capital, during the quarter we received new debt commitments as David mentioned totaling $177 million and closed on approximately $136 million of new long-term debt. As shown on the next slide, in August 2008 we obtained a secured mortgage loan commit for a $112.5 million of which half, or $56.25 million, was advanced during the quarter. This mortgage is secured by the mortgage receivable investment entered in to in conjunction with the planned resort development in Sullivan County, New York, which I discussed previously. This debt bears interest at LIBOR plus 3.5% with a LIBOR floor of 2.5% and matures on September 10, 2010, the same date our mortgage note receivable is due. This debt is recoursed to the company and requires monthly interest-only payments. It is anticipated that the remaining debt commitment of $56.25 million will be funded simultaneously with the funding of our remaining $92.5 million mortgage investment such that the net future cash commitment to EPR related to this investment is approximately $36 million.

Turning to the next slide, last quarter I reported commitments to expand our winery and vineyard facility from $65 million to a $117 million. As we have previously announced additional commitments have since been secured such that our expanded winery and vineyard debt facility is now $129.5 million. The interest rate on the expanded facility is LIBOR plus 175 basis points on loan secured by real property and LIBOR plus 200 basis points on loans secured by fixtures or equipment. The advance rate remains at 65% of the lesser of cost or appraised value and maturity date of each loan is still the early of ten years from disbursement or the end of the related lease term. The amended credit agreement is 30% recoursed to the company and also includes an accordion feature which was increased to $170.5 million subject to lender approval.

During the quarter we drew approximately $80 million on this facility and entered into interest rate swap agreements to fix the interest rates on these loans at a weighted average rate of 5.1%. Year-to-date we have drawn approximately $93 million under this facility leaving $37 million still available. Thus in a period when debt has been so difficult to obtain, we doubled our winery and vineyard debt capacity and closed a significant amount of loans on very attractive terms.

Now turning to the next slide, at September 30 our total outstanding debt was approximately $1.2 billion of which $1.1 billion was fixed rate long-term debt with a blended coupon of approximately 5.9%. We had $85 million outstanding under our unsecured revolving credit facility at quarter end and our overall leverage on a book basis was about 47%.

Certainly the focus in today's economic environment is on liquidity and as I will review with you on the next slide, I think we are in excellent shape in that regard. The first point that I would like to make is that we do not have any debt maturities in 2009. Our revolver has a one year extension that will extend its maturity date out to January 31, 2010. Additionally, our only 2010 maturity on a consolidated basis that is not currently extendable is a $112.5 million note related to our Sullivan County, New York investment, only half of which is outstanding at September 30 as I previously discussed. Furthermore, the maturity of this note corresponds with the maturity of our $225 million mortgage investment and the anticipated completion of the resort complex.

It should also be noted here that our operating cash flows more than cover our dividends and recurring principle payments. So as you can see on the next slide, we have $246 million of liquidity available under our existing credit facilities in unrestricted cash. This is comprised as you can see of $142 million of availability on our revolver, $37 million of availability on our winery and vineyard debt facility, $56 million of availability on our Sullivan County term loan and $11 million on unrestricted cash. When we consider our anticipated fourth quarter investment spending of approximately $20 million and the $125 million in 2009 investment spending that David mentioned in his introductory remarks, we find ourselves with just over $100 million. And just to be clear, this $100 million cushion does not include the benefit of any pending (inaudible) positions that David and Greg will discuss.

Now I would like to discuss our 2008 and 2009 guidance. Turning to the next slide we are re-affirming our 2008 FFO guidance of $4.55 to $4.62 per share. Additionally, as Greg will discuss further, we are also increasing our 2008 investment spending guidance from $350 million to $500 million.

I would like to make a few observations about our expected results for the fourth quarter of 2008. First as implied by our updated 2008 investment spending guidance we expect a minimal level of fourth quarter investments and these investments will have a minimal impact on FFO per share. Second, the fourth quarter results will reflect the full dilutive impact of over $2.2 million common shares issued during the third quarter. Third, the recent weakening of the Canadian dollar versus the U.S. dollar will negatively impact our fourth quarter results by approximately $0.03 as compared to our third quarter results if the current exchange rate holds throughout the remainder of the fourth quarter.

Now turning to the next slide, our 2009 FFO guidance is $4.65 to $4.95 per share and our investment spending guidance is $125 million as previously mentioned. Our relatively wide range for 2009 FFO guidance is reflective of the current state of the capital markets. If the capital markets do no improve into the latter part of 2009, we'd expect to be closer to the low end of the range. However, if there is a substantial improvement in the capital markets by the early part of 2009 we could reasonably expect to be closer to the high end of our range. It is important to point out that the low end of our range reflects the Canadian asset disposition of approximately $100 million with no FFO benefit from re-investing the proceeds in new real estate assets.

While this assumption is very conservative, it gives us the flexibility to build an even larger liquidity position than the $100 million I discussed earlier if the capital markets do not improve during 2009. The low end of the range also assumes a Canadian exchange rate similar to today's rate. This negative impact is not as dramatic as annualizing the unfavorable $0.03 impact to Q4 2008 that I previously discussed due to our existing foreign currency hedge in the planned sale of a Canadian asset which reduces our FFO exposure to the Canadian dollar.

Now let me turn it over to Greg for his comments on leasing and investing activity.

Thank you, Mark. As you will recall from our last call, we moved our capital expenditure forecast upward to $350 million and I'm happy to report to you that we have exceeded this amount with our accomplishments in the third quarter. I will speak later to our planned investments for the balance of the year but first I would like to highlight our investments for the quarter and talk about the performance of our assets.

During the quarter we invested $132.5 million in a planned resort and casino development in Sullivan County, New York. The total project is expected to consist of a casino complex and a 1,580 acre resort complex with a spa hotel, water park hotel, two golf courses, a water park, along with various retail developments. The project which is the genesis of public and private support was spurred by a legislative change that amended the gaming tax from 68% to 25% for only one county in the state of New York, Sullivan County. The project upon completion is expected to employ over 2,000 people and enjoys unique bipartisan governmental support from both the state and federal authorities. As with other construction projects we've structured our investment as a mortgage with certain rights to convert to fee ownership as the project is further developed.

During the quarter we also invested an additional $12.5 million in the Schlitterbahn project bringing our total funding to date to $126.2 million. We also completed the construction and opened a 12 screen theatre in Glendora, California that is operated pursuant to a long-term Triple Net lease with AMC. We also invested an additional $6.9 million for the expansion of one of our winery facilities, invested approximately $1.5 million for additional retail expansion in our Canadian retail centers, provided $3 million for the continued development of our Suffolk retail center and invested approximately $4.2 million for improvements at our ski facilities.

Now I'd like to talk a minute about the operating performance of our properties. Our theatre properties continue to perform well during these turbulent times with the theatre exhibition business slightly above 2007's record setting year. The industry is achieving these numbers despite a hotly contested election season that has left precious little television time available for advertising. Even in this difficult economic period consumers are still demonstrating a willingness to spend their dollars for out-of-home entertainment with this past weekend exceeding last year's same period by 41%.

I'll go directly to the slides, our public charter schools continue to meet or exceed our expectations for enrollment. For the schools that we purchased in tranche one and two, comparing the '07/'08 school year to the '08/'09 school year, we increased capacity at the schools by 6.5% and increased enrollment 10.5% resulting in an 87% overall occupancy. On the next slide regarding our tranche two school investment, our schools have an occupancy of 86% representing substantial growth from the previous year.

Although we've stated it many times before, I think it bears repeating that our schools are public schools that receive state and federal reimbursement and unlike private schools are not dependent upon parents for payment of tuition and fees. Additionally we think it's important to note that both presidential candidates have not only spoken favorable about public charter schools but have also called for their expansion to meet the needs of primary education in the future.

While the season has not begun for our ski properties, I can report to you that sales of annual passes is approximately 8% ahead of last year's numbers which should bode well for their success. Furthermore, we've completed our final review of our ski assets and the rent coverage for out portfolio for the '07/'08 ski season was approximately 1.8. And the average rent coverage for the five year period was 1.65. With regard to our vineyard and winery properties our tenants are winding down the 2008 harvest and to date sales and revenues are trending approximately 4% to 5% up over the previous year.

As the metrics indicate our portfolio is performing well but we are not completely insulated from the disruptions being experienced in the financial markets. We currently have two projects, our Schlitterbahn water project and our recently announced Concord project that include bond financing as part of their capital allocation. With the difficulties currently in the bond market these projects may be delayed. The extent of the delay will be driven by the market, however we remain confident in the fundamentals of the projects and the corresponding security and guarantees that support our investments. This potential delay, should it arise, will likely also cause a slowdown or delay some additional investment spending by us.

In our last call we also discussed having an asset under purchase contract. That transaction involving a significant Canadian asset has not closed and remains in due diligence. However, given today's economic environment we cannot give any assurances that the purchaser will complete the acquisition. What we can say is that if this transaction is not completed we are more than happy to own this asset and have no compelling need to complete the transaction.

As I promised earlier, I'd like to spend a second on our capital expenditure plan for the balance of the year. With the potential delay of certain projects that we spoke of today, our commitments for the balance of the year should be minimal and bring our total spending for the year to approximately $500 million. And as Mark has indicated we are currently budgeting approximately $125 million of spending for 2009. This spending number is not contingent upon the asset sale that we discussed today but could be supplemented by such a sale.

As we've indicated today this spending guidance is very conservative as compared to previous years and does not reflect our lack of opportunities but rather a measured approach to the times in which we exist. As I've stated, when we have greater certainly regarding the markets or these asset sales that we discussed today we will update you on further growth.

A quick update on occupancy, we continue to have 100% occupancy of our theatre assets and 95% occupancy of our non-theatre retail assets. And with that I'll turn it back over to David.

Thank you, Greg. Thank you, Mark. As we go to your questions I want to stress a couple of points made throughout our presentation segments. Number one, leverage. It is in place, largely fixed, with no maturities in 2009. Second, liquidity. Likewise, well under control with resources in place to meet all our commitments. All together these elements combined with the organic growth built into the company and its portfolio yield an acceptable albeit more modest level of growth than we regularly deliver in key shareholder returns.

Also before we open the lines I want revisit Greg's comments that we have received several separate serious offers from foreign buyers on different large portfolio assets during the last few months. And although market conditions are such that not much can be relied on these days, the good news is that we have no pressing liquidity need to complete these transactions. But the even better news is that should they be completed, they would represent substantial gains, possibly require special dividend to meet our REIT requirements and most certainly would present us with even stronger liquidity profile to approach a variety of market opportunities.

And lastly the dividend outlook. Given the strong financial profile just outlined in detail, I would guide you to expecting another dividend increase in the first quarter of 2009 continuing the annual trend we have demonstrated since our founding. No decision has been made by the Board so nothing can be relied upon yet but we continue to look towards a dividend increase consistent with our normal payout ratio the last several years of about 73% of per share FFO.

All right. With that I will turn it over to questions. And Katie, are you there?

Yes, sir. (Operator Instructions). Your first question comes from the line of Anthony Paolone. Please proceed.

Thank you. Good morning.

Good morning, Tony.

Hi. First on just the guidance you did $1.20 on FFO in the quarter so just annualized puts you up in the midpoint of your '09 guidance range. So can you just talk about what items that would seemingly have to be dilutive next year would bring you down in to like the lower end of the range?

As we mentioned in that guidance, Tony, we talked about that asset sale really treating it very conservatively and just basically paying down debt and putting it in the bank. And so you really lose what you were earning this year on that investment. It goes down to basically a debt rate or cash in the bank rate so that's really the significant decline year-over-year. That is the problem with just analyzing the fourth quarter. The other thing you have going on in that scenario is the as we talked about is the Canadian exchange rate from what we have in the third quarter versus what we expect kind of at current levels, what we budgeted for for the full year 2009.

Okay. And what's the contemplated cap rate on the Canadian asset sale?

It would, as it's currently, I don't want to get into specifics, Tony, but it's sub 7.

Okay. And then can you spend a few minutes on Schlitterbahn and the capital structure there? And what other capital has, outside of EPRs, has been put into the project or committed thus far?

Sure, Tony. During the quarter, I mean, A, it really has been driven by this disruption in the bond market. We talked earlier about the construction commitment and we actually received a construction commitment from the developer during the quarter but it was contingent upon the bond issuance. And therefore now with the disruption in the bond issuance it's kind of put that a little bit of a chicken and an egg so we're kind of waiting for those bond markets to open up. The tenant continues to put money in, our operating tenant, and we are continuing what we've talked about today is slowing that project down. We feel like we have the components there now and slowing that project down until the bond markets open back up and then finishing out that project. But as I said, with the security that we have and the guarantees that we have in place from our tenant, we feel very comfortable that we don't have any issues getting to that period when it reopens and completing the project.

Are you currently receiving cash interest or accruing interest on that debt?

They really have the choice to add to the loan or current pay. So that's really the current status.

Have they opted to accrue at this point? Or are they paying cash?

We're getting cash pay.

But they could switch that if they feel the need or just make that choice.

Yes, they have the choice each month. They can pay us in cash or they can add that to the loan and that's the status as we sit today. So we don't have any commitment per se one way or the other. We would expect probably to have a discussion with them that we'd like to see --.

But history has for them as they're generating enough cash off their other projects that they pay in cash.

They have the capability to do that.

And they save the powder for the project.

Is there a contingency plan if say this goes six months, 12 months without a bond yield being done to find financing elsewhere?

Of course we'll be definitely exploring that as we go and that involves working with both public and private sources. As you can imagine this is an amenity that both the local and state governments are very much involved with and we've gone back and talked to them about if the bond market doesn't open up for these type of bonds do they open up for TIFF type bonds, do they open for other type things and their involvement in there as well as just traditional private sources. But yes, we're definitely exploring that and it's, we've gotten assurances from bond counsel that they think this market will come back. It's just a matter of time.

And can you go through some of the same dynamics on Concord in terms of whether your interest being received there is cash or accrued?

Well, in that situation we have an interest reserve account that was funded when we did the project and so we draw down on the interest reserve account and that again, the construction lenders were committed for the entire amount of the project. The developer was awarded these bonds which were a cheaper source of funding so he in fact lowered his original construction loan commitment to reflect the benefit of the bonds. I'm sure there are discussions going on right now depending on where that bond market is and how long it's closed that he'll go back to the construction lenders and have them go back to their original commitment letter. But it was, we went the bond route because of what was perceived to be some cheaper financing for the developer but at the time of the outset we had construction commitments for the entire amount of the project from private lenders.

And when was the commitment made on that? And then subsequently I guess reduced? Like I guess how realistic is it for them to go back to the original construction lender and ask for more given the environment and what's happened in the last 60 days?

I think David has spoken to those lenders so --

Yes, I mean my last conversation with the lenders is they were prepared to, the project is viewed as very attractive and very lucrative and so the construction, the original construction lenders hadn't planned to support it without the bond component and then when the bond component became authorized they just yielded up that position so, I don't know, Tony. But as we spoke to them, things change every day but as we spoke to them within the last 30 days they were prepared to support that project without the bond commitment. So we'll just go day to day. But our last conversation with them is there were the resources absent even the bond commitment to complete the project.

And if that project gets delayed and you have a maturity date on your debt, I mean what was the anticipated source of capital to pay you back and does that put that at any risk?

I think, Tony, you've got to look at where that project is at. The construction lenders for the project are also the lenders who provided us the debt on this side of the project so our anticipation will be that they're, that people will make the necessary accommodations to complete the project because they're both, they're lenders on both sides.

Okay. And then finally with respect to the idea that you could potentially sell some big assets here that you receive interest recently, what do you think has prompted that interest? It seems to be a fairly new dynamic that we haven't heard from you all that, that you've gotten a lot of unsolicited interest to buy a lot of your assets all of a sudden. And what would be your first choice in use of those proceeds if you did go ahead with the sale?

Well, I think the interest is coming mainly because of the stability of the cash flow. I think we've kind of demonstrated over years that this is, these types of assets are, and it's buried out in this market, and people feel good about its recession resistance. As far as use of the capital, I know Mark has talked about in his plan, and we'll be honest, it's quite conservative but what we're talking about is paying down debt. Now as we get visibility that things are getting better than trust me we've got a ton of great opportunities out there that we can take advantage of right now in redeployment of that capital but I think no one's rewarded for being not conservative. So we're taking a conservative approach to this and we will see as time develops. Do you gentlemen want to?

Yes, Tony, I think it's a combination of there has been in all cases it's foreign buyers outside of North America and I think it's a matter of looking in or both, as Greg mentioned, stability. I think it's also part of North America has been different points at different times some level kind of on sale for foreign buyers, although the dollar's strengthening these days. But it's a combination of that and looking for stability in this market. We have good performing properties. And probably our receptivity that we haven't been a seller of assets but we've tended to be responsive at this time to more explore these overtures of interest.

Okay, thank you.

Thank you, Tony.

Your next question comes from the line of [Michael Berman]. Please proceed.

Good morning, it's [Greg Schlottsen] here with Michael.

Good morning.

Hi. In regards to the investment spending, the 125 next year, could you please provide a bit more color on the investment mix of that spending?

Well, the primary piece is the second, is the remaining $92.5 million on the Concord investment. We funded at $132.5 million in the current year and we plan on funding the additional $92.5 million next year to get to our $225 million total commitment. Keep in mind simultaneous with that funding we'll receive $56 million in debt proceeds so really the next commitment from a cash perspective is $36 million to the company. That's the largest but then the rest of it is existing projects that are being completed. We have a theatre project that has a remaining piece to it. We talked about the Suffolk retail project.

It really becomes drips and drabs.

Drips and drabs.

Of other projects.

There's no new theatre developments?

Not at this time.

Not at this time. With that said we have -- we have potential, incredibly good opportunities out there for theatre developments both, and I would tell you more so, Greg, on a portfolio basis. People are looking to sell five to seven theatres as a group. As you can imagine there's a significant number of large retail guys who are looking to generate cash and have theatres as part of their retail component and they've been approaching us about what we think are very good theatres at very attractive rates. The question is do we've got to gain some visibility to the capital markets that gives us the comfort that now's the time to make the move.

Right. And then what about charters. What's the likelihood that you exercise the remaining $40 million on the schools?

You know we have charter schools out there that are available to us right now. You know I think you hear a consistent theme here that liquidity is kind of king and when do you, we probably don't dip in to our liquidity until we see the availability of the next line of liquidity. And so I think it's recovery and either the debt or equity markets that gives us a sense of stability so that we can lay a base in and grow from.

The other theatre initiatives that you had, looking towards the Chinese and Indians markets, the developing the upscale content there that you Soeul, Korean thing on hold, are you still looking at that?

We're still looking at that, we're also looking at potentially doing that with partners or something with somebody else's money potentially to allow us to continue those initiatives but without diluting our existing shareholders.

And then finally -- go ahead.

I was going to say it would accretive to our existing shareholders, it's not really taking away from the liquidity existing in the company. We find a new pocket to include it. We're looking at some externally managed possibly assets to execute on some of those opportunities. They're still there.

And then could you provide a bit more detail on the extension of the line, the timing of when you can finalize that extension and who's the lender behind that?

We give our notice right about Halloween, so coming up this Friday we'll give our notice of our desire to extend and its at our option so that will be extended otherwise due January 31, '09, it will be due then a year from then, January 2010.

And who's the lender?

It's a syndicate led by KeyBanc.

Okay, thank you.

Thanks.

Your next question comes from the line of Rod Hinze, please proceed.

Hi, can you walk through the collateral on the loans for Schlitterbahn and for the Concord resort? Is it just the land that's collateral or are there other assets behind that?

For Schlitterbahn you have the land that's there but you also have the guarantees as it relates to the operations at their other parks which they have three parks in Texas and we have various guarantors there that support that and their cash flow there to support that. With the Concord we have the land, we have a pledge of (inaudible - multiple speakers) and we also have the personal guarantee from the developer. Minimum $500 million net worth.

Okay. Can you walk through how the park in Galveston handled some of the storms?

They did suffer some damage but as you can imagine it was an outdoor water park, they're probably prepared to bring on some water.

If any place is prepared to get wet.

They had a couple of large structure slides that suffered some damage but that was fully insured and our discussions with them is they anticipate being fully operational for next season. That's a seasonal business and they will open back up in the season in the spring.

Okay. And then did you walk through on your cash draw downs on the Schlitterbahn project. Is that inclusive of accruals? Or is that just the cash drawn done?

That's total everything that we have got into the project.

How much of accruals are in there?

I don't have that handy. We have about $126 million, $127 million invested total including interest.

If you look at it it's really a lot of, there's about $92 million of land acquisition and then you've got prep and side work so it's substantially dollars that are either in the equipment for the water park, we've done all of the site work, expanding the road.

Major infrastructure for the sewer, electrical, all that.

So it's truly probably most everything in there is land and land prep.

Okay, thanks.

Your next question comes from the line of [Steve Randonovik]. Please proceed.

Yes, hi, this is actually Craig Kucera on for Steve. I had a question, did you guys give any update on the Toronto Life Square project today? And if so kind of any of their needs to get financing to complete that project.

We did not give an update on that project. The project is essentially complete. I think we have about maybe 10% remaining vacancy on that. The theatre is up and performing very well, the retail is performing very well. So we're very happy with that asset.

The project is performing according to plan and the NOI is according to plan including the billboard leasing is going reasonably according to plan which is a substantial part of that asset's income.

Right.

Craig, it does have a construction loan. The maturity of that is coming up and you know we really, we're waiting to get the input on from our partner there on basically what the terms of that so we can determine our conversion right and rate into that project. And if we want to execute that.

It's got underlying construction loan with a maturity in Q4 but also the developers that's not us, we're lender on the project, at this junction has an invitation from the primary lender to make application for an extension on that loan.

Okay, so it will be more an extension of the construction loan as opposed to more longer term financing on the real estate?

We don't know at this point as there's several developments going on at Metropolis that could either create our time of converting or exiting that investment and we're just kind of seeing how that plays out.

I got you. So would it be your, kind of what are you guys thinking is going to happen? You're probably going to roll this into an equity position or exit it in the next couple quarters?

I would think that's true.

Okay. And I just want to make sure I understand the accounting for the Concord mortgage investment. I believe you guys are going to be booking that at 13.9%. Is that then cash coming off of an interest reserve?

There is an interest reserve. There's a couple components to that. We get an upfront commitment of 3% first of all, so it's up front. The interest rate on that is 9% for the first year and I think 11% for the second year and then we get paid at the end 105% of our original principle amount so accounting wise you put that all together it creates a 13.9% effective interest rate on the project over time.

There's some component of that that's the back end exit fee but the vast majority of it is gone down as the reserve.

Part of the reserve, yes.

So do you guys have any estimate what the straight line impact might be for next year?

I don't because the commitment fee and the principle amount, that 105%, you could do the math if you just schedule that out, I don't have that handy but it's if you think about an up front fee of 3% recognized over the term, you think about a 5% back end payment, you think about interest at 9% and 11%, you could settle that out and you kind of see what the receivable grows by in the earlier periods.

I appreciate the color on that.

I don't have that handy with me.

Yes, that's fine. I can do that. You guys had a pretty robust acquisition pipeline and I think someone else mentioned the charter schools and the vineyards. What are your, I know you're being cautious and retaining capital and liquidity but is there any, do you have any concern about sort of the options you have on some of those projects as well as maybe with Capelli expiring or is it do you feel like you can extend those and that's there's still a great amount of interest for you guys to participate once the capital markets open up?

Let's talk about them specifically, Craig. The school, I don't think we any concern about extending our ability to continue our relationship. We're in contact with those people regularly. They see us as a capital partner to execute their business plan and they are equally aware of the turbulent times that we're dealing so we feel very good about that.

With Capelli I think we feel very comfortable. This is a long standing relationship of developments and things that we're involved with him in. As far as our wine, our wine we really don't have any one where we have a certain option. Our relationship with Global Wine Partners is not a timed relationship; it's been one where we both are committed to a JV. So I don't really see that. On the other side of your question I that you were talking a little bit about different opportunities where we're seeing things and I'll go back to that.

If I was telling you right now probably the best opportunities that we're seeing right now are in theatres. I mean there's just some really, really great opportunities out there right now in our core set whereas some of the stuff earlier this year may have been a little bit away from that and into some of these new areas. Right now there's just some really exciting things going on out there as far as potential for deals.

I don't even, on our options, I don't even know of expiration periods. Really the relationships that underlie those are really what's the strength of that and they're very strong and our expectations is as the markets regather themselves that those are going, they're still available to us. But as Greg said we've got a lot of opportunities outside of that.

And in fact with our charter we're talking to them about beyond '09, '10,'11 capital plans and how we fit in with those.

Substantially beyond the original $200 million contemplated, we're talking about substantial more than that.

Right. I know you guys historically have not bought back a lot of stock and I'm not even sure if you have. Could you give any comments on if you have a buyback authorization out there? And I know everybody spoke just right now on maintaining liquidity but that said is there the opportunity to do that?

Craig, from long time ago, I mean and this is probably several, several years ago, our Board authorized a stock buyback. That really had a number limitation, not a date limitation. So there is technically one out there. But I think it really goes to what yield you can buy those at versus what kind of yield that we can do asset purchases at.

That secondly we're in a economically, globally, and in an economic cash-constrained environment, or capital-constrained environment, most people are going the other way and kind of retaining liquidity than buying back shares. But I think Greg is right. If things were to open up you'd have to evaluate it versus what we could do in other projects. We're seeing some great yields in other projects that might be more attractive than even buying back our own stock. Even at rates that are in the 30s or share price levels that are in the 30s.

Got you. No, I think that makes sense. And then finally, in your guidance I believe you didn't have the asset sale in your guidance so is it under the assumption that kind of the $60 million or $70 million sort of net spend you would have excluding the $56 million loan with Concord would be underline.

We did have (inaudible) facilities.

Oh you did,

When we went through our cash flow liquidity we didn't consider the asset sale. As far as guidance what we did is assume the asset sale and assumed a reinvestment of proceeds either to pay back debt or to put it in the bank. So we're not counting on it for liquidity in case it doesn't happen, went through it without it but for guidance purposes we have assumed it does happen and we're conservatively investing it.

Because the assumption that it does happen, the sale does happen and we just sit on the cash balance or pay down debt, it's more conservative for FFO performance per share. So we assumed the more conservative posture. And the liquidity Mark went through, the more conservative assume it doesn't happen and that's what we assumed there.

I got you. Thanks for the color, guys.

Thank you.

Thank you.

(Operator Instructions). Your next question comes from the line of Rich Moore. Please proceed.

Hi, hello, guys.

Hey, Rich.

Hi, Rich.

I'm thinking about the whole investment side of things as well and it sounds like if I hear you guys correctly there's some good opportunities next year, some maybe distressed opportunities, some interesting things coming up and I'm wondering what the other side of the balance sheet has to be. You have debt, you have equity potential. First on the debt side, what would you guys be looking for? What are you hearing maybe from the banks out there, the loan officers out there? What would it take at this point do you think to get additional financing capacity?

What we're hearing primarily, Rich, is call me back in 30 days. So guys aren't really saying but our guess is we've got the, as Mark indicated, we're continuing to assemble debt even in, look, it's been wild the last 30 and 45 days but it's been even crazy for some time now. And even during this quarter concluded we put together substantial debt at attractive rates. Why? because I think we have performing properties, we have a strong balance sheet and so as this thing comes back and unless you believe that we're just all going to go into the caves, it's going to come back to some degree and I think we're going to be earlier available to the debt market than most. Particularly for people in our niches and so we're going to, I think we'll be able to aggressively embrace those market opportunities. But I don't think we really have given, we have not been given any kind of marks that here's where you need to be.

No but I do think as David said, I think, Rich, we'll get some clarity as we extend our line we're going to begin discussions with our line. As we get the clarity on what that renewals is going to look like. That gives us, once you have that taken off the board and you have that done, now all of a sudden your dry powder opens up to use and we can start putting that stuff to work pretty accretively.

Okay, and your guess would be down the road a bit still, a quarter maybe, that kind of thing before you get that sort of confidence?

A lot of people are talking. There's some easing that people have been talking about in the credit markets as we still here today and a lot of people are talking about mid '09 at least what I've heard, mid '09 when the credit markets start to come back.

Okay, all right, good.

And another thing I'll mention is we've got commitments on current projects and even if we do a new project and get debt, liquidity is still king, you've still got to come up with the portion that's not outside financed and at this point, in this stage with the way the markets are today, we're more in a kind of liquidity maintenance position than we are a new spend, new projects state. Like I said, that could change though as the credit markets move.

And I think, Rich, you have to think that everyone here is mindful of the fact that you know even if we can do something accretively you have to be wise to the fact that do you want to sell stock at these prices. You've got a substantial amount of shareholders who are in above this value and not that it takes you to get all the way back but you want to have a very, very compelling story before you start going back into that market and you want to know that there's a solid base there when you go out into it.

Okay, that was sort of the second part of my question. So you would really have to do thing in the near term more with debt because issuing equity down here just doesn't make any sense.

That's correct. And I think what you've seen is we've created a lot of debt capacity and as that market comes back I think that's the way that we'll grow us back and kind of restore some stability to where our growth patterns normally are.

If you think back to the slide I put up, actually the company has de-levered into its kind of current position from where it's been and so the debt capacity is there, as Greg pointed out and we'll probably do some things with debt and until we clarity really, we'll probably not going to go aggressively focus on leverage even if it becomes available until we really see our way to managing the balance sheet the way we like to and be able to place equity as well.

We've got our commitments well covered today and a good position to be in.

I think, Rich, our commitment to our shareholders is two-fold, it's both stability and grow accretively and so stability seems to be the name of the game today and as we talked about today we want to show that we've got that stability, that this is a story that's not, you've seen so much tremendous volatility with some other names. We want people to have assurances that this is a name and a value that's going to hang around and be here for the long haul.

Okay, all right. Very good, guys. Thank you. And then one last thing. Is it my imagination or did the number of charter schools go down by one?

They actually did and the fact that we had a one charter school that had a right to buy back from, it was that Imagine had previously purchased, somebody else, and the underlying school had the right to buy themselves out and be owned by the kind of families of the kids and the school and they exercised that right and we allowed that to occur.

At our costs.

At our cost. So we went in and out of the same.

Okay, I got you. So no gain on sale.

No.

All right, great, thank you, guys.

Thanks.

Your next question comes from the line of John Braatz. Please proceed.

Good morning, guys.

John.

David, you had mentioned that you've seen some interest from the Mid East potentially purchasing some of your properties. Anything you can tell us in terms of the size? Do they want to buy $50 million, $100 million, $200 million? Anything you can, any color you'd like to add on that?

John, I don't know I mentioned the Mid East, I did mention foreign. I'm not going to chase it around too much but they are outside of North America and yes, we did mention that the one we talked about last quarter that continues on under a due diligence has been extended at this time is an excess of $100 million and by and large these are larger assets rather than single smaller assets, they're larger assets or groups of assets.

Theatre properties, correct?

They are.

Okay.

So we haven't, that's about all we've put on that and given our negotiations, I think people ought to know that those are potentially out there but at the same time I don't want to get that ahead of itself. It's nothing that we've finalized to close yet.

Pardon?

Nothing that's been finalized.

Right, I understand. And I'm sorry, I missed the number earlier. The Canadian operation that's pending sale--how large is that? And potentially when could it close?

What we said was as David said it's over $100 million and you know they're in due diligence so I would say my best guess would be the next 60 to 90 days.

Okay, thank you very much.

Your next question comes from the line of [Dan Romeco]. Please proceed.

Dan?

I'm sorry. Okay.

Hello? Hello? Can you hear me?

Yes, sir.

Oh, sorry. Earlier you had mentioned the opportunities specifically in theatres. Can you provide some additional color to the specific market factors that kind of lead you to that conclusion?

Well it's not market factors as much as it's been offers. People are contacting us with specific portfolios of properties that they're looking to dispose of and asking us to present an offer on and we have discussions about kind of indicative terms that we would consider looking at them. We're seeing very little resistance to that.

Less about distressed properties, more about distressed sellers who need to raise cash in this environment that we could take advantage of. I think Mark said it well, exactly.

Okay, thank you very much.

Okay.

Thank you.

At this time, sir, I'm showing we have no further questions.

Okay, well everybody we, as we said at the top, we appreciate you joining us. We always, these are good intervals to catch up. We hope the message got through about the good position of the company and we're hopeful for the stability of the market to make even more progress. If you need to please contact the company, we're glad to talk to you. Thank you all. We'll see you next quarter, if not talk to you. Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect. Have a wonderful day.